Bill Russo

Bill Russo has a wealth of experience and knowledge about China’s automotive and truck industries as anyone and I always enjoy his writings on those industries. He recently came out with a five part article on “Competing in the China Truck Market” and it is excellent.

Like so many excellent articles on a single industry, almost all of what Russo says about China’s truck industry applies with equal force to competing in the China market as a whole.

If you are doing business in China or just thinking of doing so — be it related to trucks or not — I recommend you go here and read all five installments of Russo’s article.

And if that article does not help you with your China business, I’ll eat my hat.

Yes I know few of you are interested in China’s commercial truck market. I am somewhat interested in China’s commercial truck market, but only because I used to do all of the international work for a large commercial truck manufacturer until it was bought by an even larger commercial truck manufacturer. But whether you are interested in commercial trucks or not, I strongly recommend that you read Bill Russo’s Five part series on Competing in China’s Commercial Truck Market. The first of the series is here, the second here, the third here, the fourth here, and the fifth here. But Why?

Because Bill Russo just flat out knows China’s commercial truck business knows what it will take for foreign companies to compete in it. And because what it will take for foreign companies to compete successfully in China’s commercial truck business has all sorts of parallels to what it will take for foreign companies to compete successfully in a whole host (all?) other businesses in China. In other words, Russo’s five part series makes for great reading for anyone doing business in China or looking to do business in China.

Just by way of a brief example, I quote you the following from part five:

Most multi-national companies that aspire to be global leaders have no choice but to find a way to win in the Chinese mid-market.

The common strategies employed by MNCs are to

Ignore the risk and avoid competing in China’s mid-market altogether.

Offer global products and wait until China catches up to more upscale demand, which works only for a limited number of sectors.

Pursue a two-tier strategy with a core brand sold along with a lower-priced “good enough” brand considered. MAN is following this approach since early 2011 and Daimler trucks are considering it with their partner Foton.

Multinationals simply cannot afford to cede this mid-market to local competitors. Instead, they must set about organizing themselves to face the emerging Chinese competitors on their own terms — with products that meet Chinese needs, developed at Chinese cost, and which can then be taken out of China to other markets around the world. They must stop thinking about what it is they can bring to China, and instead start focusing on what China’s mid-market can offer them — what culture and structures they must adopt that will allow them to innovate at a lower cost and to deliver the goods and services that will drive the next round of global growth.

Good analysis/advice for companies looking to make it in just about all markets, and I recommend it.

Just read a great article on China’s auto industry, titled, “Chinese OEMs and the U.S. Market – Fact vs. Fiction.” The article is by Bill Peng, John Jullens, and Bill Russo. Grossly summarized, the article throws cold water on the idea that Chinese car manufacturers will be ready to invade the United States auto market by 2020. Before I discuss more about this article, I will first refer back to two earlier posts where I discussed China auto readiness.

In my first post, way back in 2006, I took issue with a speaker who predicted Chinese cars would be hitting the U.S. in two years.

My second post dealt with a meeting I had just had with Bill Russo in Beijing who had reinforced my view that China’s car industry had a long long way to go before it would be able to make any sort of mark in the U.S. market:

There are those who state confidently that China will own the worldwide car market within a few years (these people have been saying this for years — check out this post from three years ago where I rightly said NO WAY) and there are those who state it will never get there. My only qualifications are that I come from Michigan and I have represented a few auto and truck manufacturers and a whole slew of auto parts manufacturers, including many in or going into China. But like just about everyone else, I have a view, and mine is that China eventually will do well selling low end cars worldwide, but that it is not yet close to selling good cars in the United States. I spent seven hours in my car yesterday (driving back and forth to Wenatchee, WA) and there is no way I would have chosen a Chinese car for that trip. And it’s not just me.

I landed in Beijing last month with my wife and daughter. The first taxi in line was a very old VW. The VW driver started putting our luggage into his trunk when a Chinese woman came over and asked us in pretty good English whether we wouldn’t please take the taxi behind us (a much newer, but Chinese model) because she was going on a long trip with her family. My wife asked her why she wanted the one cab and not the other and the Chinese woman gave an embarrassed look, but said nothing. I explained to my wife that this woman did not want to go on a trip with her family in a Chinese car, but she was too embarrassed/nationalistic to say so. Since we were merely going to our hotel, it was no big deal and so we allowed the switch.

On that Beijing trip, I met with Bill Russo, a former Chrysler VP in China, now head of Synergistics Limited and, most importantly, a true expert on China’s auto market. One of the things Bill told me during our meeting was that the Chinese would rather buy non-Chinese cars but buy Chinese cars based on price. That has always been my sense, but since I mostly hang out with Chinese attorneys who drive Buicks and Toyotas (mostly), I am not going to claim to have a representative sample.

But the big question regarding China autos is when they will make their mark outside China and Bill Russo just came out with an extremely thorough and thoughtful piece on his blog that says, “not yet.” The post is titled, “The Path to Globalization of China’s Automotive Industry,” and it says that China auto must achieve various intermediary benchmarks before it is ready for the world stage. If you have an interest in China’s auto industry, this post is not to be missed.

A few weeks ago, I read a blog post from a Canada-US designer, Caroline Di Deigo, who traveled to China to, among other things, see the houses at The Commune at the Great Wall. She had been very excited to see these houses after having admired them in books, but upon seeing them up close, she was disappointed by their construction:

For several years I had been excited by images in architectural books of the houses at The Commune at the Great Wall, so this trip I made a detour from our group to see it for myself. The Commune at the Great Wall was developed by Zhang Xin between 1998 and 2002, when she commissioned 11 Asian designers each to design a house, situated in a rugged hilly location within view of the Great Wall. These houses, while privately owned, now function as a resort. In my opinion however, it is really a monument, or series of monuments, to design. At first glance it’s very impressive, with unique expressions of ‘house’, ‘home’, ‘dwelling’. On closer inspection though, I found them somewhat disappointing. Possibly due to their ultimate function, they lack much of a ‘residence’ feel, and seem a bit barren, very much like ‘public spaces’, vaguely ‘museum-like’. And to get really nit-picky, the quality of construction is unfortunately lacking, and from what one reads, certain of the designers were in fact quite disappointed with the implementation of their visions, as indeed I might have been.

Chinese cars are in many ways the same.

Well apparently, Chinese cars are still in many ways the same and Russo’s new article explains why China’s auto industry is not yet close to being ready for the United States market and also why its capabilities are so often overestimated:

The actual performance and capabilities of the leading Chinese vehicle manufacturers—as well as their readiness to compete in developed markets such as the U.S.—is overestimated, for several reasons. First, the size and scale of these companies is fairly small, especially separating the sales volumes of their Western joint-venture partners. In most cases, the joint venture itself far overshadows the relatively young Chinese brand. In addition, the domestic market in China is geared to first-time buyers in hyper-competitive entry-level segments, where margins are difficult to sustain, so their overall profitability is typically quite low. That reduces the resources these companies have to expand overseas.

Furthermore, none of the leading Chinese manufacturers have yet achieved a major product or process breakthrough that could give it a significant competitive advantage. This is in sharp contrast to companies like Toyota, which built its initial position in the U.S. through its famed Toyota Production System, a new and—at the time—vastly superior operating model relative to Detroit’s approaches at the time of its introduction.

The article goes on to note that the Chinese auto manufacturers understand their shortcomings and are focusing their international sales on developing countries, not the United States. The article then speaks to what China’s auto manufacturers must do to “crack global markets”:

Chinese automakers must develop world class global supply chains and supplier partnerships, offer competitive financing products, and deploy the talents of a global human resources pool. That won’t happen overnight. It will also take some time for Chinese carmakers to learn to compete in markets where they don’t have the benefit of a low-paid labor force, management team, and supplier base, as well as favorable subsidy policies from the central and local Chinese government. It will also be essential for these companies to build a retail network and brand in the U.S., which is a substantial investment.

This all makes sense to me and I think it applies with equal force to most China businesses, both manufacturing and otherwise.

Two excellent quotes from Bill Russo in one article. Bill formerly headed up Chrysler Asia and he is now based in Beijing with Booz & Co. He knows China’s auto industry as well as anyone.
Both of these quotes come from a Detroit News article, entitled “Ford-Geely deal spells out tech sharing” [link no longer exists]. The article highlights Detroit’s skepticism about China Auto’s willingness to abide by tech sharing agreements.
Russo’s first quote is on intellectual property protection in China and it nails it by pointing out how the laws are fine, it’s enforcement that is the issue:

“There’s a well-articulated set of intellectual property guidelines and laws, but there hasn’t been consistent enforcement of those laws,” said Bill Russo, a Beijing-based consultant with Booz & Co.

We often counsel our clients who license their technology to Chinese companies that they should front-load as much of the license payments as possible and that they should only enter into the licensing arrangement if it makes sense even if they are only paid for the first year or two under a longer term deal. We tell them this because our experience has been that Chinese companies do fairly often (though less than in the past) stop paying licensing fees after they no longer need further assistance from the foreign company licensing the technology.
But my favorite quote from Russo is on how China’s auto manufacturers are not “there yet” when it comes to making a world class car and is explanation for this shortcoming:

Auto analysts say the Volvo acquisition will help Geely gain expertise in vehicle development — an area where China’s fledgling carmakers are all weak. Geely has only been making cars since 1998, while expertise in vehicle development is built over five-year product cycles.
“It’s like you can go to medical school and be a straight-A student, but until you’ve been a doctor for 10 years, you’re not going to be that good at it,” Russo said.

But give China time:

But it won’t take long for the Chinese to catch up.
“We probably had this discussion about Japan 40 or 50 years ago, and we probably had this discussion about Korea 10 to 20 years ago,” Booth said.
“The world is accelerating, and China is accelerating very fast.”

There are those who state confidently that China will own the worldwide car market within a few years (these people have been saying this for years — check out this post from three years ago where I rightly said NO WAY) and there are those who state it will never get there. My only qualifications are that I come from Michigan and I have represented a few auto and truck manufacturers and a whole slew of auto parts manufacturers, including many in or going into China. But like just about everyone else, I have a view, and mine is that China eventually will do well selling low end cars worldwide, but that it is not yet close to selling good cars in the United States. I spent seven hours in my car yesterday (driving back and forth to Wenatchee, WA) and there is no way I would have chosen a Chinese car for that trip. And it’s not just me.

I landed in Beijing last month with my wife and daughter. The first taxi in line was a very old VW. The VW driver started putting our luggage into his trunk when a Chinese woman came over and asked us in pretty good English whether we wouldn’t please take the taxi behind us (a much newer, but Chinese model) because she was going on a long trip with her family. My wife asked her why she wanted the one cab and not the other and the Chinese woman gave an embarrassed look, but said nothing. I explained to my wife that this woman did not want to go on a trip with her family in a Chinese car, but she was too embarrassed/nationalistic to say so. Since we were merely going to our hotel, it was no big deal and so we allowed the switch.

On that Beijing trip, I met with Bill Russo, a former Chrysler VP in China, now head of Synergistics Limited and, most importantly, a true expert on China’s auto market. One of the things Bill told me during our meeting was that the Chinese would rather buy non-Chinese cars but buy Chinese cars based on price. That has always been my sense, but since I mostly hang out with Chinese attorneys who drive Buicks and Toyotas (mostly), I am not going to claim to have a representative sample.

But the big question regarding Chinese cars is when they will make their mark outside China and Bill Russo just came out with an extremely thorough and thoughtful piece on his blog that says, “not yet.” The post is entitled, “The Path to Globalization of China’s Automotive Industry,” and it says that China auto must achieve various intermediary benchmarks before it is ready for the world stage. If you have an interest in China’s auto industry, this post is not to be missed.

A few weeks ago, I read a blog post from a Canada-US designer, Caroline Di Deigo, who traveled to China to, among other things, see the houses at The Commune at the Great Wall. She had been very excited to see these houses after having admired them in books, but upon seeing them up close, she was disappointed by their construction:

For several years I had been excited by images in architectural books of the houses at The Commune at the Great Wall, so this trip I made a detour from our group to see it for myself. The Commune at the Great Wall was developed by Zhang Xin between 1998 and 2002, when she commissioned 11 Asian designers each to design a house, situated in a rugged hilly location within view of the Great Wall. These houses, while privately owned, now function as a resort. In my opinion however, it is really a monument, or series of monuments, to design. At first glance it’s very impressive, with unique expressions of ‘house’, ‘home’, ‘dwelling’. On closer inspection though, I found them somewhat disappointing. Possibly due to their ultimate function, they lack much of a ‘residence’ feel, and seem a bit barren, very much like ‘public spaces’, vaguely ‘museum-like’. And to get really nit-picky, the quality of construction is unfortunately lacking, and from what one reads, certain of the designers were in fact quite disappointed with the implementation of their visions, as indeed I might have been.

What do you think? Have Chinese cars arrived or are they three, five, seven, ten or more years away? When will a Chinese car brand have the reputation of Toyota, BMW or even Hyundai?

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About China Law Blog

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.